Medco and United Healthcare – What Will Happen?

With Walgreens announcing that they were going to sell off their PBM assets (something I’ve suggested was going to happen for a while), the attention is clearly on what United Healthcare will do with their relationship with Medco.

Right now, United operates both a captive PBM (Prescription Solutions) and has an outsourced PBM relationship (Medco). Together the two represent about $27B in spend – $16B for Prescription Solutions and $11B for Medco. This decision is significant in terms of several things:

• Which model is “better” (i.e., the logic, structure, and timing of their decision)
• Medco revenue
• UHG strategy

As I talked about a few weeks ago, the trend has been to shed the internal PBM assets and sign long-term contracts. Will that happen here?

There are several options which I think could be considered:

1. Renew a Medco contract and continue to operate both models while slowly migrating lives to Prescription Solutions;
2. Further segment the relationship with Medco by making separate decisions regarding PBM management, claims processing, mail order, and specialty thereby insourcing parts but not all of the Medco relationship;
3. Terminate the Medco contract and move all the lives to Prescription Solutions; or
4. Sell Prescription Solutions to Medco and sign a long-term agreement.

There are lots of things to weigh here:

• What, if any, are the implications of the MLR definition and health reform on the benefits of ownership versus outsourcing the PBM?
• Will health reform impact the mix of lives (group, individual, Medicare, Medicaid) and how will that affect the immediacy of the decision?
• How much money do they make on the PBM asset and is the cost of capital to transition clients and make infrastructure investments worth it?
• Is there some type of structural relationship (e.g., Wellpoint and Express Scripts) that offers them tax advantages?
• What is the value of the Prescription Solutions asset if sold?
• Are there underwriting benefits to ownership of the PBM (i.e., current Medco lives)?
• Can they get a price from Medco on managing the lives that is comparable to what it would cost them to run their PBM?
• Does the scale of adding the current lives from Medco into the Prescription Solutions model create such cost efficiencies that it makes them more competitive in their existing markets?

I’m not sure how this will play out, but this will certainly be a huge decision under any situation. Of course, all the other PBMs would like to play here to either get the contract instead of Medco or buy the Prescription Solutions assets, but I don’t see those as likely outcomes.